Q2 2022 Parkland Corp Earnings Call
Good morning, My name is Pam and I will be your conference operator today at this time I would like to welcome everyone to parkland 2022, Q2 results Analyst Conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then the number two.
I would now like to turn the conference call over to MS. Valerie Roberts director of Investor Relations for Parkland. Please go ahead.
Thank you operator with me today on the call are Bob Espey, President and CEO and Marshall <unk>, Chief Financial Officer. This call's webcast and I encourage listeners to follow along with the supporting slides. We will go through our prepared remarks, and then open it up for questions from the investment community.
You can limit yourself to one question and a follow up as necessary and if you have other questions reenter the queue.
We would ask analysts to follow up directly with the Investor Relations team afterwards for any detailed modeling questions.
During our call today, we may make forward looking statements regarding expected future performance. These statements are based on current views and assumptions are subject to uncertainties, which are difficult to predict. These uncertainties include but are not limited to expected operating results and industry conditions. Among other factors risk factors applicable to our business are set out in our revised annual information form and management.
Management's discussion and analysis.
We will also be discussing non-GAAP and other financial measures, which you not have any standardized meaning prescribed by EIOPA breath. These measures are identified and defined in parkland continuous disclosure documents, which are available on our website or on SEDAR.
Please refer to these documents as they identify factors, which may cause actual results to differ materially from any forward looking statements.
Dollar amounts discussed in today's call are expressed in Canadian dollars, unless otherwise noted I will now turn the call over to Bob.
Great. Thank you Bill and good morning, everyone. We appreciate you taking the time to join US I'm delighted to lead off by acknowledging our announcements to exchange 20 million parkland shares for the remaining 25% of Sol held by the Simpson family.
This will consolidate our ownership of salt to a 100%.
We appreciate the opportunity to continue to work and grow our relationship with the Simpsons. They are highly supportive shareholders, who share our conviction in the parkland strategy and long term vision. We are excited to continue our long standing relationship with the Simpsons, who upon completion, we will own approximately 19, 5%.
<unk> of parkland I.
I believe now is the right time to consolidate our ownership we're doing this on a leverage neutral basis and can see significant future growth opportunity.
<unk> family has and will continue to play an integral part in our growth we greatly value their continued support and I. Appreciate the confidence they are showing in the parkland team's ability to build long term value.
Turning now to the photo on today's cover which features one of our recently rebranded retail locations in Miami you recall that in December last year, we seized an opportunity to leverage our existing commercial and supply business in Florida by adding a retail network our purchase of or be it provides us with immediate retail scale and density.
After we closed the <unk> transaction, we began the integration process. We have tied these sites into our existing supply platform and applied are on the run brands several locations, which are being well received the result is visually strong and it helps differentiate us in the market our integration of this retail network reflect.
Our broader integration activity, which plays a key role in our growth and success with that let's dive into the quarter.
Quarter after quarter, we continue to demonstrate the resilience of our diversified and integrated business model and our ability to grow through economic cycles. In Q2, we delivered adjusted EBITDA of $450 million. This brings us to $837 million year to date, both records for our company.
Through 2022, we have focused on integrating and capturing synergies from the great companies. We have acquired we are trending well ahead of schedule on our synergy capture Marcel will speak about this later on the call.
We are also focused on reducing our leverage ratio, we are making strong progress in lowering our leverage by <unk> three turns in the quarter to $3. Two we expect to return to below three three times early next year. Our consistent performance is underpinned by many structural advantages are trading logistics and refer.
Mining expertise helps us reliably source and make competitively priced product.
Our supply infrastructure enables us to transport store and deliver our products across 25 countries, we serve diversified customers spanning retail commercial wholesale shipping and aviation.
Each have diverse product needs our integrated business model is unique among our peers and it positions us to optimize margins through each part of the value chain, while remaining competitive in our markets.
Through Covid.
Unit margins offset volume declines in our retail business and again this year, while commodity prices are dampening COVID-19 volume recovery unit margins are offsetting volume and inflationary pressures in our commercial business, we sell diesel propane.
Aviation and marine fuels, we continue to see strength in volumes grew 6% year over year.
Growth as we integrate acquisitions when national accounts and expand these businesses across our footprint. We are confident in our integrated model and our growth trajectory. We are pleased to announce an increase in our 2022 adjusted EBIT guidance of one six to $1 7 billion.
Combination of consistent operational performance and increase in our guidance and our consolidation of Sol gives us confident to meet our $2 million $2 billion of adjusted EBITDA by mid decade, our exceptional results are underpinned by hard work and dedication of our talented <unk> team.
<unk> some of whom you can see on this slide I would like to extend my sincere. Thanks for their ongoing commitment to parkland I'll now turn the call over to Marcel to speak in more detail about the financial results on slide four.
Bob Good morning, everyone.
The team delivered record second quarter results of $450 million of adjusted EBITDA net earnings for the quarter were $81 million or <unk> 52 per share up from a loss of $64 million or <unk> 42 per share in quarter two of 2021.
It's great results demonstrate the strength of our business model.
I will start with the Canadian segment, which generated an adjusted EBITDA of $174 million. This is up 38% from the prior year.
<unk> benefited from higher volumes from ongoing COVID-19 recovery, or <unk>, and <unk> acquisitions and organic growth.
<unk> benefited from solid unit margins in part offsetting some cost inflation.
Across our company retail network, we delivered same store fuel growth of two 1% with our own carrier sides, leading the way at the eight 5% growth year over year more broadly the Canadian retail fuels volume returned to within 10% of the 2019 levels.
We continue to see some changes to customer behavior in response to high commodity fuel prices last quarter, we highlighted that some customers are buying less fuel each visit but are coming to see us more often this trend has continued this quarter. We also saw a slight decrease in premium great fuel volumes as some consumers.
Reached two regular grades.
Moving to Tibet Court, we continue to see the positive impacts of our center of store merchandising strategy on a same store basis packaged beverages salty snacks, and candy were up 611, and 12% respectively.
Overseas customers have dialed back on car washes lottery tickets prepaid cards vapor cigarettes. These categories lowered our overall same store sales growth through negative eight 2% year over year, and a negative <unk>, 6% excluding cigarettes.
The previous two years were exceptional in terms of same store sales due to COVID-19 related lockdowns, making into current quarter are difficult to compare.
We expanded our merchandize margins from 29% to 35% year over year and this was done through proactive margin optimization and the contribution from food, including from eminence fruit market.
Our international segment generated an adjusted EBITDA of $87 million up 24% from the prior year unless you know, we usually refer to three distinct markets in market types of international first the diversified economies, such as Puerto Rico, and Dominican Republic are seeing steady recovery from Covid.
Second the tourists dominated economies, where COVID-19 impacted tourism and rising energy.
Prices have impacted local the models are clear indications that tourism is returning which will improve local demand.
Finally, the resource driven economies, such as Suriname, and Guyana, which are experiencing significant economic growth and parkland is playing a leading role in meeting the growing energy needs in these markets from both commercial and for both commercial.
Marshall and retail customers.
You will see that across the international removing more volume, but with a lower average unit margin and this is driven by changing sales mix that includes increased wholesale volumes aviation fuel LPG.
And diesel for electricity generation this adds to the diversification and resilience of our business.
Looking to the end of the year, we are optimistic that an earlier than usual startups to travel season, and our acquisitions will continue to drive growth in our international segment.
Our USA segment generated $51 million of adjusted EBITDA during the quarter and this is up 70% from prior year.
Fuel volumes are up 60% year over year, driven by the great businesses, we acquired and continued organic growth in our commercial and wholesale businesses. For example, our teams were able to capitalize on the extended spring planting season, and we delivered additional agricultural volumes during quarter two.
We continue to offset inflation and capture incremental unit margins through a volatile markets driven by our end to end business model, our fuel unit margins in the U S increased from around four cents per litre to seven cents per diluted year over year and this also reflects the benefits from our retail acquisitions last year.
We enter the second half of the year retail wins, the form of a full cruise ship season, and a positive stocks due to summer driving season.
Lastly, our refining segment generated $164 million of adjusted EBITDA, which is up 33% from the prior year and this was underpinned by record crack spreads, which resulted in a net refining margin margin of approximately $53 per barrel.
The refinery co processed 2100 barrels per day of bio feedstocks and delivered a composite utilization of 88, 4%. This is slightly lower than anticipated due to a power outage, which cost the temporary unplanned shutdown at.
Our team in the refinery manage this really well and safely restarted within a few days without interruption of deliveries to our customer.
As you know, we hedge a portion of our volumes through manage commodity price risk and in the quarter. We also took the opportunity to lock in the above average cracks during a time of historical highs and just provides downside protection to our cash flows and more certainty on our deleveraging profile.
These programs will continue through the back half of the year and will affect the margin capture relative to the market.
From a net price perspective, combined operating and marketing general and administrative costs were $479 million.
Up 34% from 'twenty to 'twenty, one and this is mainly due to the inclusion of the acquired businesses, which is responsible for half the increase and to a lesser extent. The increase was also driven by variable costs to support higher volumes at prices such as credit card fees and staff costs returning to normal.
Inflation is impacting a number of areas of our business as we continue to proactively manage costs. Most of these cost increases are industry wide and we have the opportunity to process onto the market.
During the quarter, we generated cash flow from operations of $341 million, which funded our second quarter working capital needs dividends and capital expenditures.
Now moving to slide five.
Parking has a proven track record of acquiring high quality companies successfully integrating them and capturing synergies.
Previously outlined the contributions from our acquisitions between quarter three of 2020 of 2020 and quarter one of 2022.
<unk> 19 acquisitions, including two in quarter. One this year were expected to contribute about $225 million this year growing to $315 million by 2024.
Now expect these acquisitions to contribute about $250 million this year, which reflects an accelerated synergy capture and growth in the base business that we acquired.
As we integrate these great businesses recapture synergies in three broad categories supply operations and the back office all the supply side, we bring acquisitions onto our existing platform and we get synergies through enhanced purchasing power sourcing flexibility and logistics optimization.
Our record of success here, and particularly our <unk> Obs Lynch and <unk> acquisitions are ahead of plan.
Operationally, our integrated business provides significant scale and attract more customers. Our international segment has run three major airline contracts in Puerto Rico, Barbados, Jamaica, and our increased scale and track record gives major national accounts in the U S confidence that we can meet their needs.
And the back office, we are aligning our processes and systems to create greater efficiency and scalability.
Integration and synergy capture are among <unk> core strengths and Esther graph shows we believe you're well on track to deliver the $350 million of adjusted EBITDA from the recently acquired businesses by 2024.
Moving to slide six.
When it comes through capital allocation rebalanced, three key priorities shareholder distributions deleveraging and as the development and acquisitions for 2022, we are primarily focused on deleveraging, but we have not ignored the arbitrage.
For shareholder distributions, we have increased our dividend every year for over a decade and most recently, we have increased our dividend by over 5% and we currently have a dividend yield of three 6%.
Our dividend payments are consistent and dependable and are underpinned by a resilient business model.
Integration of acquisitions and delivering synergies continues to be focus of this year and it also supports our broader deleveraging strategy.
Two dishes helped us lower our leverage ratio from three five to $3 four two times at the end of June we had $1 $4 billion of liquidity through a combination of cash on hand and credit facilities.
Last year, we fixed about 75% of our interest rate exposure.
As we extended $3 $2 billion of bond maturities through 2026 and later in the decade and this has provided considerable interest savings and additional financial flexibility.
We expect Q3 leverage to be impacted by the close of our previously announced husky and Jamaica acquisitions.
After that our material cash flow will drive our leverage ratio down further and we expect to be below three times by early 2023.
Moving to slide seven.
As Bob mentioned, we announced last night that we have reached an agreement to exchange 20 million Parkman cash for the remaining 25% of Sol and this consolidates, our international segment and increases parkman ownership of that business through a 100%.
We believe now is the right time to complete the share exchange for several reasons first it is immediately accretive to all shareholders, while on earnings per share and cash flow basis. It is neutral to our leverage ratio and it also provides funding clarity to our rating agencies and lowers their leverage calculation where debt financing also shoes.
Second it's a simple exchange of 20 million shares and these will be issued at the prevailing market price.
Third the evaluation is consistent with the arms length put coal agreement from our initial 2019 Sol transaction, which as we previously disclosed.
Fourth the shares are being issued through to Simpson's family, who are supportive long term shareholders with an investment horizon through the next decade and beyond and this demonstrates our confidence in parkland or management and growth strategy.
And finally, it simplifies our corporate structure and reporting once completed we will eliminate the minority interest in our results and the existing co liability from our balance sheet.
Following the close of the share exchange market, we will have about 175 million common shares outstanding and our largest shareholder the sympson firmly will own approximately 19, 5% on a trailing 12 months basis. This share exchange at about $110 million of adjusted EBITDA and this represents a novel.
Step towards our $2 billion ambition by mid decade.
I will now pass it back to Bob for his closing remarks on slide eight.
Great. Thanks, Marcel and thanks for your insights on the quarter before we open the line for questions I would like to take a moment to update you on some of our strategic initiatives initiatives, you'll recognize this slide on the screen from our Investor day back in November it showcases our strategy and provides clarity on our focus.
In our developed pillar, let's discuss organic growth. Despite the great quarterly results. We saw some softness in select convenience categories, such as cigarettes tapes and car wash to address this we are executing a growth plan that includes targeted promotional and pricing strategies center of store remains a.
<unk> within our C stores, we had several promotions planned for the summer and fall, including a national retailer sales contest that focuses on basket size and upselling to continuously enhance the customer experience. We are investing in a national food program, which will refresh and strengthen our coffee and.
Food offer it will provide our customers with a better product increased consistency among locations for enhanced marketing and promotions and provide a platform for future food expansion.
We will also expand our Eminem express offer in Quebec for the first time.
In our diversified pillar, we are strengthening our digital connection to our customers. We added over 300000, New journey members in Q2, bringing total members to $3 5 million. Our journey members have an 18% higher fill rate and a 9% bigger basket compared to non journey customers compared to last quarter.
Consistent with our integrated business model, we have begun cross promoting our Eminem food market business with our journey members and our spin to win contest is currently underway in the Decarbonize pillar, we are progressive progressing our ultrafast EV charging network NBC customary.
Experience is critical here and our recent research trip to Norway in London, I saw firsthand the need for reliable charging quick food and convenience and clean Washrooms, we are being thoughtful in our planning RPC network to include unrivaled amenities positioned and strategic on rote.
Locations supply chain.
Emitting bottlenecks mean, we now anticipate completion of our network in the second half of 2022.
I'm very proud of parkland performance year to date, we are firmly on track to achieve our 2 billion ambition by mid decade. This would not be possible without the hard work and dedication of the entire parkland team.
Complete confidence in their ability to take parkland forward and deliver our strategy with that I will now ask the operator to open the line to questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three John prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the cooling process. Please press star followed by two and if you're using a speaker phone. Please lift your handset before pressing.
One moment for your first question.
Your first question comes from Kevin Chiang with CIBC. Please go ahead.
Hi, Good morning, Thank you for taking my question.
Thanks for the slide on.
On the deleveraging waterfall, there maybe if I could just ask the longer term.
Deleveraging plans I think at your Investor Day, you talked about being investment grade.
I sit here today, if I look at your guidance, though.
The $1 7 billion of EBITDA at the upper end devices.
The Sol minority interests.
$110 million.
Some synergy capture that the husky.
Transaction closing later this year that these organic growth opportunities. It does feel we can get to 2 billion without.
Without further at least major acquisitions.
Does that suggest maybe a re prioritization of free cash flow towards.
Towards deleveraging and does that change the path towards when you want to be investment grade.
In terms of that timeline.
Good morning, Kevin Let me, let me kick it off here and I'll turn it over to Marcel look I'm really pleased with the deleveraging we are able to demonstrate in the quarter and it does point to the strong cash flow that we do generate as a business consistently and reliably.
That coupled with the.
The consolidation of the minority position installed into parkland will.
Have a.
A significant benefit on our particularly our rating agency debt.
At matrix and we certainly want to we'll certainly benefit from that strong deleveraging here going into next year.
Which will help us on that path, but I'll turn it over to Marcel to provide some additional color.
Okay.
Yeah, no in terms of so Kevin good morning in terms of our in terms of our.
Our capital allocation priorities that hasn't really changed but as I think we told before we have been very busy on growth and allocating capital to growth in the last year leverage had run up so that is the priority to debt and throughout that period, we have continued to increase.
Shareholder distributions as well in terms of our overall leverage guidance that hasn't changed we've said two to three turns that's our normal range.
We are willing to go up to three and a half if we see the right acquisitions as we did last year and now we are kind of kind of sliding back.
Gliding back to which that normal range of two to three turns which we expect to be in the early parts of next year I think in terms of our aspirations to be at investment grade that ambition to investment grade. We are a highly cash flow generative business and if we continue just on the path to $2 billion.
Generate cash flow.
I expect that leverage to come down which was one part of that question to investment grade.
The other parts has been clearly around the relative weight of the refinery within that which has been one of the rating agencies' concerns and we'll continue to kind of course grow our marketing businesses to get there. So theres been no change in that and we'll just continue to.
To deliver the results and bring that leverage down to the normal range.
That's helpful and then maybe to the second one for me you talked about some of the.
The changes in consumer behavior in the second quarter, just given with the run up in pulp.
Prices now that those start to come down a little bit have you seen I.
I guess, maybe a normalization or at least the return to maybe previous consumer spending habits, whether its people.
And Dave on premium gas again, more car washes and they'd be more foot traffic.
I guess the story by buying more volume just wondering what youre seeing during the third quarter.
Yeah.
So.
We it is great to see prices come down for consumers, it's always good and beneficial to our business and we do expect certainly as we're in so the last half of summer here in in.
In Canada, and the U S that will see demand continue to grow and be strong.
The lower prices should help that and that's consistent with what we've seen in other periods, where we've had inflation in pump prices when they do come off consumers do tend to.
Resort to their previous buying habits.
Okay. That's very helpful. Thanks for taking my questions Congrats on getting all the costs aligned there.
Your next question comes from Ben Isaacson with Scotiabank. Please go ahead.
Thank you very much and good morning, congrats on the quarter and getting that Sol deal done.
Two questions first one your fuel margin has been trending higher for the last few years in Canada, it's been a little bit more choppy in the U S and somewhat flattish in international.
The increase in Canada.
How much of that is in your control in the Q2 MD&A you called out your digital and analytical capabilities as to helping your Canadian margin is that something that we can quantify in basis points or cents per litre.
That uplift and is it sustainable.
As you rollout your digital and analytics into the U S and international should we expect to see trending higher fuel margins there as well.
Or is this all really more market driven.
Trend is much more coincidental.
Good morning, Ben and thanks for the question.
I would say, we definitely have invested in our digital capability, which has helped us.
With our pricing.
These difficult to parse out exactly what the benefit of that is versus where the market's at.
I would say.
<unk>.
In the first half of the year in the U S. We did rollout.
That form so expect that to help that business going forward and we should see a long term benefit of that in that market. So, but again always difficult to parse out what's market and what's due to changes in our in our operating protocols.
And just secondly can you remind us the game plan for rolling out the Standalone convenient stores or is it still too early to kind of map that out.
Yeah, no. It's a so we are progressing that and as you can expect.
There's sort of two two key things that need to happen one is with the purchase of Eminem. We're looking at how we integrate that offer both from a frozen frozen and fresh perspective into our Standalone concept. So we're doing some consumer work and some work.
In in the concept of the store and then the second thing is finding locations we have secured locations.
Key in Vancouver, I think we're up to three locations that will launch late this year early next year and be in market and start to prove out the concept. So quite excited about that as a growth opportunity for the business.
Great. Thanks, so much.
Your next question comes from Steve Hansen with Raymond James. Please go ahead.
Oh, yes, good morning.
For the time.
Just looking at the international results in combination with the Sol transaction, just curious if anything changes from a strategy standpoint on your side or if it's just could be continued status quo. The divisions of course, performing very well, but just trying to understand it to be any sort of capital allocation priorities that changed if at all.
Look again, we're really pleased to bring that 25% back to parcel rain to parkland.
And.
In terms of the business. The business has performed exceptionally well when you look at the original EBITA, we purchased them where the business is running added significantly higher it's been a combination of some growth capital.
Some M&A.
Some synergies and then the business has been very successful at leveraging its supply platform for organic growth. We do continue to expect and see a strong organic growth in the region and as we know as we find good value and leverage our.
Permitting.
We will continue to invest both on the organic side and in M&A.
We find good value in the market.
That's helpful. Thank you and just curious if you could perhaps just spend a brief moment on the renewable diesel opportunities that you've highlighted in Vancouver here going forward.
Yeah.
Our renewable diesel so we were looking at sort of two two compliance pathways. One is our co processing, which are really proud of what the team's been able to achieve there and we continue to push our.
Production rates and that's a highly beneficial to our to our business and our economics in that market.
And I think you know in the quarter, we hit a record of three and a half thousand barrels a day.
So again and and the team has been able to experiment with different feedstocks, and lower lower costs, and lower <unk> and higher Ci carbon intensity feedstocks for lower carbon intensity feedstocks, so which is great.
Coupled with that we also announced an R&D plant, which would be a new facility within within the refinery, which would add another $6 5000 barrels a day that coupled with our growth in our co processing would take our total capacity to 12000.
Barrels a day.
And make us the largest manufacturer of of renewables in the province of BC.
Now the other thing is really really pleased and appreciate the support we get from the BC government to make sure that we can invest in the facility and keep it.
And keep it economic as the energy mix changes here.
If you do the same.
Okay.
Your next question comes from Derek <unk> with Canaccord. Please go ahead.
Yeah, Hi.
Think about your international business I appreciate the three buckets that you.
Outlined can you just help us.
With the with the exposure with the splits between tourism commercial activity in aviation within that business line.
I don't have the exact splits top of mind.
At the same size, that's where we split it that radio Derik, so they're about a third each.
Okay.
Yes.
Okay. That's helpful.
And then just in terms of.
Your in store business.
Assuming given the inflationary pressures that everyone's been facing you were able to pass through some price increases on that side can you just comment on the magnitude of the average price increase on the in store.
Yeah, and look we do have pricing power.
The in store, we did push price.
That would be consistent.
With with.
I would say the average inflation, we've seen a spike here in the recent quarters.
We have to also be cognizant of what our what the consumer can absorb but again the channel has demonstrated.
Enormous resiliency independent of the market conditions, and we expect that to continue over the longer term.
So would that be like a 5% ish number.
Yes, roughly.
Yes, okay.
Thank you very much.
Okay.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning team and thanks for taking the time and congrats on strong results I just wanted to build on.
The Sympson family and it sounds like they are long term investors based on the indications that you have given on the call, but can you talk about how the market should think about their involvement in the business, both strategically and financially and are there lockups that are associated with this transaction. Thank you.
Yes, I mean, let let let me lead off here with.
<unk>.
Their commitment to the business again, we the Simpsons have been shareholders since 2017.
They are.
Our.
Very supportive of our strategy and our growth that we've been able to achieve and of the management team.
They're supportive of our long term vision for the business and have conviction around our base business over the long term in the regions that we operate so we were really pleased to expand there.
Their ownership in parkland. They are a long term patient shareholder that understands and can see the value that we can drive within within the business.
And is there any additional corporate governance that will be involved here or whether its board representation or.
Or involvement in the database business.
No look the the hour.
The current.
The way they currently interact with business will continue which basically as a large shareholder.
But they are not involved in the governance for the day to day management.
Simpson Seth.
Helpful for us in our international business because of their experiences in those markets and we will.
They've offered and certainly.
Take them up on <unk>.
Continue to systems as we needed in those markets, but from a day to day operational or strategic perspective, I mean.
There is no direct involvement.
Thank you and then the follow up is just on.
How are you thinking about the refining business out in Vancouver.
Unbelievably strong crack spreads.
In the first half of the year, we've seen gasoline come off a little bit here. How are you thinking about the margin outlook and your ability to profit from them and then can you also talk about your hedging strategy around cracks as well.
Yes, So let me, let me lead off and I'll turn it over to Marcel here again, the fundamentals for that facility remained strong over the long term and we certainly look at the long term in that facility. When we when we look at an end value of that asset with same park land so very.
Confident about that and we're confident about our ability to transition.
A portion of that facility into renewables to meet our compliance obligations and the structural benefit or the structural advantage of that facility remains.
In terms of both pricing and discounts on accrued from a crude perspective.
Now I'll turn it over to Marcel he can provide some more color listen our outlook on refinery margins for the rest of the year continue to be constructive whether there will be at record levels. We saw so far this year a bit hard to to gas I guess, but I think they continue to be constructive as well.
And as Bob said, our refinery is a bit unique in that it captures the upsides and the tests that protection on the downside and if you look historically you see it doesn't go down and be able to certain level as well our approach to risk management or commodity price hedging in general is that we take a risk neutral position on the <unk>.
<unk> volumes that we have but that typically are exposed through to crack spreads. So we typically don't hedge that what has changed this year as we were early in the year on crack spreads right now we felt it wasn't opportunity give us very volatile. So two things one it gives an opportunity just to get a bit more predictability into pricing, which helps and optimization of how you run the refinery, but also to look into.
Some of that margin and it will give us cash flow certainty that will help into current profile of deleveraging that we trying to achieve.
Continued it for the rest of the year, it's a small portion of it.
But it's.
Roughly about 10% of the off the production at the refinery and we will continue to it for the rest of the year.
Okay.
Okay.
Your next question comes from Matthew Weekes with <unk> capital markets. Please go ahead.
Good morning, Thanks for taking my question just looking at the business and you know how the BCE low carbon fuel standard is positive for your low carbon development.
Opportunities at the Burnaby refinery looking at the implementation of a federal cleanup.
Clean fuel standard I was just wondering if you had any kind of initial thoughts on how you see that impacting the business. The kind of opportunities do you think it could bring to help decarbonize for your customers across the country going forward. Thanks.
Good morning, Matthew and thanks for the question.
Parkland is well set up.
In terms of the new standard that is.
Going to be slowly rolled out.
And again I would speak to our strength not only in manufacturing, but on the supply and trading side. When it comes to renewables and also our carbon offsets are trading business all stand to benefit from these changes in a positive way.
Okay. Thanks for the commentary ill turn it back congrats on the good quarter. Thanks.
Okay. Thanks.
Your next question comes from Michael Van <unk> with TD Securities. Please go ahead.
Hi, good morning.
I just wanted to ask you more on the operational side because your execution has been very solid in what many of.
Described is a difficult environment. So I was hoping you could discuss any operational challenges that youre managing through and where are they what your outlook for them is whether it be labor availability or supply chain or whatnot.
Yeah.
Look in <unk>.
Thanks, Thanks for the question and also the recognition for our team and their ability to operate our business.
Through the volatility that we're seeing again, let me start off with.
First and foremost the advantage of our integrated model and our diversified platform.
And while we may have seen some headwinds specifically in our convenience business that was more than offset with growth for example, in our diesel business, which was very strong across all three regions.
Throughout the first half of the year.
The other area, where we're seeing is gasoline demand has not yet returned to 2019 in Canada and we've seen it come off a little bit in the U S. Because of some of the inflationary pressures.
But again.
The strength of the business both on the commercial and on the supply side was was able to offset that quite handily, so and again.
That that platform really does shine in a volatile period.
And also our shareholders benefit just because of the reliability of the cash flow that we can produce quarter over quarter.
Specifically.
You know look we have had some.
Inflationary headwinds in our.
Business.
Specifically, we did see.
In the U S business, it's hit Us more.
We have seen inflation in our driver wages, both in Canada, and the U S more in the U S.
But those have been offset by our being able to push.
Some of those all of the inflationary pressures back into the market.
In our margin so.
And again, you know that the structure of the industry are very similar.
Competitors, so everybody's incentive to make sure that they recover those inflationary costs.
You know in terms of labor availability.
We have seen.
Some tightness in the market U S. I would say in Canada, our retailer model has been a benefit through this period.
Our partners, our retail partners have been able to.
Absorb some of the shortfall in labor and also some of the inflationary pressures in.
In the short term here and again.
We're not seeing any impediments on our on our ability to operate our hours of operation across all jurisdictions.
That's very helpful. Thank you.
Yeah.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star. One. Your next question comes from Peter Sklar with BMO capital markets. Please go ahead.
Good morning myself.
When you went through the in store business in Canada.
Kind of the same store sales numbers kind of came fast and furious and I'm. Just wondering if you can go through all those numbers again.
And also if you can just elaborate a little bit on what initiatives. The company has taken taking to get the comp back into positive territory.
What your outlook is for the remaining quarters of the year in terms of in store sales.
Yes.
I mean, let me kick off and then I'll turn it over to Marcel here again on the promotional side.
The.
On particularly on the.
Tobacco or the nicotine side, you know there are some opportunities where we can get a bit more precise in the way that we priced the market.
And.
Take it and drive a bit more volume.
The second thing is on the car wash side.
Our team there is rolling out a series of promotions to connect.
Carwash with further fuel discounts, we've seen that and use that in the past to incent folks back in and again carwash that's been soft across the industry.
Particularly due to inflationary pressures, but again, we want to help the consumer a bit here and then sent them back into into the car wash, but those are two examples that we will be doing within those categories I'll turn it over to Marcel to talk specifically about yeah. So.
So Peter the other two.
The numbers I mentioned service central store merchandising. So the stuff that you see when you concentrate into the store packaged beverage they were up 6% salty snacks up 11% and can be up 12%, So desk, where we saw good increases.
Increases in the areas, where we saw decreases car washes.
Lottery tickets prepaid cards vapor cigarettes does happen to be lower margin products in general right and so.
But they particularly cigarettes I spoke mentioned there is a big portion of it. So if you look at the overall same store sales growth Q2 that was a negative eight 2% you take the cigarettes Iot was negative <unk>, 6%, but it really also encourage you to look at what the same store sales numbers for Q2 of last year, because that's been the comp.
With 2020 over a two year period.
And the way I would describe it this just actually yes, we sold during Colgate when consumer behavior changes rapidly and we see that again inflationary pressure and higher gas prices as people come in and that you see to buying behavior of the consumer into backward changing and what is of course unique with the C store model is that we can.
Can change the offering quite rapidly we can put promotions in place we can put different size packaging, we can promote our own 59th Street brand.
In in that mix and so we have lots of tools within the C store, which is a small box of course to change to a quickly changing demand profile as well.
That help.
Can you embark to newer Bob just elaborate a little bit on what the issues were with tobacco and the significant.
Negative sales resolved it sounded like Bob that you Werent satisfied with your price position you kind of missed on your price positioning can maybe talk a little bit.
Because it just seems going.
You have a long way to go it sounds like from the numbers to get that back into positive growth territory.
Yeah again in <unk>.
Canada, we did see a decline in cigarette sales across the board and certainly are our suppliers are telling us that.
<unk>.
I'd say so.
Chunk of the decline the majority of the decline is industry related and what's driving that.
Sure.
We did see we continue to see more.
More migration of cigarette sales into the illicit market.
And so they are their share is growing of the tobacco.
Sales and then you know.
I guess good news for Canadians fewer Canadians are smoking and that seems to have accelerated here.
Beyond sort of traditional.
People not smoking. So that's those are two things that are affecting the industry as a whole I would say on the pricing side, you know our team got a bit aggressive on the margin side in a few markets and.
They need to.
Reverse that here.
And align the.
The pricing with where we've traditionally been in the marketplace.
But look cigarette aside as Marcel says or low margin.
Our team is doing the right thing I mean, they want to make sure that they are.
<unk> properly within that segment, but most more importantly.
The team is focusing on our new categories.
More aggressively rolling of food.
<unk>.
I talked earlier about bringing eminems more prominently into the businesses, which is not something we will see in the short term, but certainly our our fresh offer.
Our sites is something that we started a rollout earlier in the year we call it.
Called the bistro offer and it's focusing on coffee.
And baked items and <unk>.
It's an area that we are.
Basically a refreshed and we'll continue to roll out here through the balance of the year, we expect that which is a high margin category to offset some of the decline.
As I talked about some targeted promotion and.
And again focusing on targeted promotion on center store, but also again the conversion back to four court continued penetration of our journey program, which again, we had astounding growth within the quarter one of the things that we started to do is cross promote between Emma.
EMS and our land and our fuel our journey program and again early days, but seeing very positive results there and so all of these things we expect to recover our position here and get back into positive territory over the next couple of quarters.
Okay and one just one last question.
What would be a good timing assumption for when Youre close on taking out the minority interest of the international the Caribbean business.
Yeah by the end of the year.
For sure obviously, our team always pushes to get things done quicker, but.
We do have a number of regulatory hurdles to overcome none that we see as any as high risk, but they do take time.
Okay. Thank you.
Okay.
Your next question comes from Luke Davis with RBC. Please go ahead.
Hey, good morning, everyone.
<unk>. This was addressed already idled in a few minutes late here, but I'm wondering if you can speak a bit to just the timing on Sol some of the background on how that came together and why that was sort of done outside the option date.
Then just more broadly I mean Sol was obviously fairly unique but what are your expectations for M&A.
M&A in other geographies for the balance of.
This year and then going forward.
On the Sol site.
I would say a couple of things again, we really like the business and.
We are pleased to bring in 100% into parkland I mean, we're basically running that business right now, but not getting the direct economic benefit.
Through to our balance sheet.
In terms of timing look like with the.
Any any opportunity.
We were able to find deal space.
And again.
Really pleased to have the Simpsons increased their position in parkland, they've been a great partner, we see them as a strategic partner in parkland and a long term one and always good to have long term committed shareholders in the story.
That recognize value over the long term. So we saw that as very positive we saw that's positive too.
Reduce our.
Our rating agency leverage and get the benefits of the cash flow into into parkland.
From a <unk> and the deal is accretive it's accretive from a cash flow and an EPS perspective. So it does help us on an overall metrics basis.
It also cleans up a lot of the noise that we've been having in our results.
Alright.
Our team has spent a lot of time explaining to people.
On the M&A side again, consistent with what we've said previously I mean, we're not active in the market.
And.
Don't expect to be sell until we get our leverage back within target.
We're very comfortable with our ability to meet our $2 billion.
Growth objective by mid decade, and can certainly do that with the cash flow that the business can generate.
Specifically, Jamaica acquisition has closed in July so that's already in and that you will see that in quarter three and then the Husky acquisition, we're getting to the last bits here for regulatory approval. So.
We expect it to to kind of close over there over the next year there'll be the could be the end of quarter three may be early quarter four.
Of course, we will update you as we go in there's nothing else in the pipeline from that perspective.
The one comment I would make on timing of the Sol acquisition.
The comments you made before US you know to BCA or business combination agreement, which we have previously gave us a call option and that put option window of three months window kind of from the beginning of March to the beginning of June .
<unk> communicated we ran out of that particular time to do that transaction, which was an all cash transaction, which we which we didn't think from our perspective.
While subtract if we couldnt do that and vice versa.
With in line with the spirit of this transaction or this combination that we have done.
More doable for us more space, there too to do that and more alignment to get that deal with them.
Yes, good to see.
That's helpful color.
Just on capital spending as well low end this year, but where do you guys see that going next year just in the context of the larger business inflation and supply chain dynamics, so that all that sort of stuff.
Next year.
We will start to invest in the R&D plant. So we will see capital come up marginally.
I would say.
R R.
In terms of our ongoing capital that's affiliated with our marketing business, we intend to two <unk>.
Continue to invest in our organic growth initiatives.
I would also say that.
From an inflationary perspective.
We have seen that impact I would say the bigger impact though it was just time is the availability of both.
Material and labor has slowed our spending down but it hasn't.
Eliminated and the opportunities that we're pursuing.
The other thing to think about look next year, we have a turnaround so that adds some maintenance capital. So you can look at past turnarounds, where it sits.
Typically so I expect that we're going to be higher we haven't guided specifically yet as we still are finalizing the plans.
And I think as both already alluded to as well, particularly on other growth Act.
Activities, we clearly want to time that.
And so that we don't spend into an inflationary environment for contracted cost of materials or just higher if we can do exactly the same thing cheaper in a different period. So the timing of that we clearly think it through as well.
That's helpful. I appreciate it thanks guys.
Great. Thank you.
Your next question comes from Steve Hansen with Raymond James. Please go ahead.
Oh, yes, thanks, guys for the follow up just a quick one on journeys continued growth I think you added another 300000 members in the quarter you are pushing $3 5 million now I think that's about 10% of the Canadian adult population.
Curious if you have a sense for how this program benchmarks now at this stage relative to some of the more established programs in the country like Petro points. For example in membership but it is also where you think that membership can grow to over the next couple of years. Thanks.
Yes.
I would say we are certainly in the top 10 position within the market.
We we continue to.
Have opportunity with that program and I would say the biggest opportunity.
On the organic growth in the promotional is to bring other partners into the program similar to the way we have CIBC.
The other would be again continuing to integrate it with the <unk> platform, which again, we did some cross promotion, which was fairly basic I mean, we basically ran a.
Promotion to Eminem customers with the code they could enter into journey to get a benefit so theres a lot of friction in that but ultimately we'd like to run the Eminem loyalty program through the journey program, which would have a direct connection into the business. So look there's there's certainly.
Growing this two five to 6 million participants is something that we believe is achievable and it's something that we.
We should expect to see here over the next two three years.
I appreciate the time and I did take advantage of the cross promotion was great. Thanks.
[laughter].
There are no further questions at this time. Please proceed.
Great well. Thank you thanks for listening and look forward to chatting with folks at the next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.